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Base business lacks traction
CHANGE
Markets ignoring base business performance which lacks traction
We believe markets are completely focussed on successful US FDA/DoJ
resolution and scheduled launch of generic Lipitor next month. Base
business traction is not coming through even after significant passage of
time and remains an area of concern. Initiate coverage with a REDUCE.
CATALYST
Stock lacks triggers once regulatory issues are resolved
We do not see any major triggers once regulatory issues are resolved and
Lipitor is launched as per schedule. Attention, therefore, is bound to
return to base business performance as the next major FTF launch is only
in 2014. We believe sharp base business margin expansion is in the price.
VALUATION
SoTP based price target of INR435
Our TP implies 15.5% potential downside from current levels. We value
Ranbaxy’s base business at INR384 (16x one year forward earnings) and
Para IV pipeline at INR51. Key risks to our call is sharp pickup in base
business operations, less than estimated price erosion for generic Lipitor
and any delisting attempt by the parent.
COMMENT
Key highlights of the report
§ Trend in base business margins
§ Five potential scenarios for generic Lipitor launch
§ EPS sensitivity from Lipitor launch (price erosion and market share as
variables)
§ Para IV filings for Ranbaxy
§ Base business margin assumptions
Key risks
Sharp pickup in base business growth which also pushes margins upwards
Post the takeover by Daiichi Sankyo, Ranbaxy has made significant investments/shift in business strategy.
We expect results of the investments made over the last few years to deliver in 2012. We estimate base
business to witness a revenue CAGR of 12% to INR98.6b over 2010-13E, led by the US (19%), India
consumers (20%), Africa (14%) and India branded generics (13%). We estimate base business margins to
improve to 15% at the end of 2013 as against 6.4% at the end of 2010. Better than estimated base business
performance will have a material impact on sales growth as well as our margin assumptions
Less than estimated price erosion and generic competition in Lipitor
At a base case, we have assumed 70% price erosion and 30% market share, the impact for which works out
to be INR20/share. Less than estimated price erosion during the exclusivity period will have an impact on
our Para IV valuations but no impact on base business valuations. For example, with a 50% price erosion
and 25% market share, per share impact works out to be INR27/share.
Synergy benefits come earlier than expected
We have highlighted that the most important synergy (which benefits Ranbaxy the most) is launch of
Ranbaxy’s generic products in Japan. We believe this opportunity is only likely to materialize in the long
term and hence is not a part of our earnings estimates. If synergy benefits come earlier than expected, it
can have some impact on our earnings assumptions
Parent looking at de-listing Ranbaxy from Indian stock markets
Parent Daiichi Sankyo holds a 64% stake in Ranbaxy. Time and again there have been media reports
suggesting a de-listing of Ranbaxy from Indian stock markets. Any such corporate development may have
an adverse impact on our stock call.
Valuations
Market ignoring concerns on base business which is moving slower than expected
We believe market participants are ignoring concerns on the base business which is moving slower than
estimated. Ranbaxy’s base business margins continue to be single digits to low teens even after some time
has passed after these investments were made. We estimate base business to witness a revenue CAGR of
12% to INR98.6b over 2010-13E, led by the US (19%), India consumers (20%), Africa (14%) and India
branded generics (13%). We expect Ranbaxy’s domestic formulation sales to be in line with market growth
given its acute therapy focussed product profile.
Market awaiting Lipitor launch, US FDA/DoJ settlement post which attention will return to base business
We believe markets are heavily focussed on the potential launch of generic Lipitor in November 2011 along
with resolution of US FDA/DoJ issues. Once these two events are behind us, we expect markets would start
concentrating on base business numbers which are unlikely to improve materially. We do not think it will
be easy for Ranbaxy to gain the lost market share on products withdrawn from the US market as the gap
has been almost three years now. We are also not clear on Ranbaxy’s long term plans for the US generics
market.
Base business valuations expensive, initiate coverage with a REDUCE and a September 2012 TP of INR435
Ranbaxy trades at 28.2x 2011, 24.5x 2012 and 18.1x 2013 base business earnings. We believe these
valuations adequately capture the earnings CAGR of 20% over 2010-13E leaving little room for upside. We
value Ranbaxy’s base business at 16x 12-month forward earnings to arrive at a base business value of
INR384/share. We value Ranbaxy’s Para IV opportunities at INR51/share (lower than consensus numbers) as
we believe the recent trend in Para IV launches (high price erosion even in high end generics due to the
presence of an authorised generic) would continue. Our combined price target is INR435/share which gives
us a potential downside of 15.5%. Initiate coverage with a REDUCE.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Base business lacks traction
CHANGE
Markets ignoring base business performance which lacks traction
We believe markets are completely focussed on successful US FDA/DoJ
resolution and scheduled launch of generic Lipitor next month. Base
business traction is not coming through even after significant passage of
time and remains an area of concern. Initiate coverage with a REDUCE.
CATALYST
Stock lacks triggers once regulatory issues are resolved
We do not see any major triggers once regulatory issues are resolved and
Lipitor is launched as per schedule. Attention, therefore, is bound to
return to base business performance as the next major FTF launch is only
in 2014. We believe sharp base business margin expansion is in the price.
VALUATION
SoTP based price target of INR435
Our TP implies 15.5% potential downside from current levels. We value
Ranbaxy’s base business at INR384 (16x one year forward earnings) and
Para IV pipeline at INR51. Key risks to our call is sharp pickup in base
business operations, less than estimated price erosion for generic Lipitor
and any delisting attempt by the parent.
COMMENT
Key highlights of the report
§ Trend in base business margins
§ Five potential scenarios for generic Lipitor launch
§ EPS sensitivity from Lipitor launch (price erosion and market share as
variables)
§ Para IV filings for Ranbaxy
§ Base business margin assumptions
Key risks
Sharp pickup in base business growth which also pushes margins upwards
Post the takeover by Daiichi Sankyo, Ranbaxy has made significant investments/shift in business strategy.
We expect results of the investments made over the last few years to deliver in 2012. We estimate base
business to witness a revenue CAGR of 12% to INR98.6b over 2010-13E, led by the US (19%), India
consumers (20%), Africa (14%) and India branded generics (13%). We estimate base business margins to
improve to 15% at the end of 2013 as against 6.4% at the end of 2010. Better than estimated base business
performance will have a material impact on sales growth as well as our margin assumptions
Less than estimated price erosion and generic competition in Lipitor
At a base case, we have assumed 70% price erosion and 30% market share, the impact for which works out
to be INR20/share. Less than estimated price erosion during the exclusivity period will have an impact on
our Para IV valuations but no impact on base business valuations. For example, with a 50% price erosion
and 25% market share, per share impact works out to be INR27/share.
Synergy benefits come earlier than expected
We have highlighted that the most important synergy (which benefits Ranbaxy the most) is launch of
Ranbaxy’s generic products in Japan. We believe this opportunity is only likely to materialize in the long
term and hence is not a part of our earnings estimates. If synergy benefits come earlier than expected, it
can have some impact on our earnings assumptions
Parent looking at de-listing Ranbaxy from Indian stock markets
Parent Daiichi Sankyo holds a 64% stake in Ranbaxy. Time and again there have been media reports
suggesting a de-listing of Ranbaxy from Indian stock markets. Any such corporate development may have
an adverse impact on our stock call.
Valuations
Market ignoring concerns on base business which is moving slower than expected
We believe market participants are ignoring concerns on the base business which is moving slower than
estimated. Ranbaxy’s base business margins continue to be single digits to low teens even after some time
has passed after these investments were made. We estimate base business to witness a revenue CAGR of
12% to INR98.6b over 2010-13E, led by the US (19%), India consumers (20%), Africa (14%) and India
branded generics (13%). We expect Ranbaxy’s domestic formulation sales to be in line with market growth
given its acute therapy focussed product profile.
Market awaiting Lipitor launch, US FDA/DoJ settlement post which attention will return to base business
We believe markets are heavily focussed on the potential launch of generic Lipitor in November 2011 along
with resolution of US FDA/DoJ issues. Once these two events are behind us, we expect markets would start
concentrating on base business numbers which are unlikely to improve materially. We do not think it will
be easy for Ranbaxy to gain the lost market share on products withdrawn from the US market as the gap
has been almost three years now. We are also not clear on Ranbaxy’s long term plans for the US generics
market.
Base business valuations expensive, initiate coverage with a REDUCE and a September 2012 TP of INR435
Ranbaxy trades at 28.2x 2011, 24.5x 2012 and 18.1x 2013 base business earnings. We believe these
valuations adequately capture the earnings CAGR of 20% over 2010-13E leaving little room for upside. We
value Ranbaxy’s base business at 16x 12-month forward earnings to arrive at a base business value of
INR384/share. We value Ranbaxy’s Para IV opportunities at INR51/share (lower than consensus numbers) as
we believe the recent trend in Para IV launches (high price erosion even in high end generics due to the
presence of an authorised generic) would continue. Our combined price target is INR435/share which gives
us a potential downside of 15.5%. Initiate coverage with a REDUCE.
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